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Glossary of IB Economics Terms

To excel in IB Economics, students need to have a good understanding of Economics Terminology. This is can be rather daunting for most students. In this page, we created a glossary of IB Economics terms to help students search for Economics definitions in just a few clicks. We hope you will find this tool useful.

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IB Economics Terms

A country is said to have an absolute advantage in the production of a good if it can produce more of it with the same resources.

Accelerator principle or theory

A theory of investment level determination where the level of investment depends on changes in national income. A (Keynesian school) explanation for the instability of investment in a market economy.

Accounting costs

Production costs for which a firm makes explicit monetary payments.

Actual and potential growth

Actual growth refers to increases in real GDP through time, potential growth refers to a shift outwards of the production possibilities boundary.

Ad valorem tax

An indirect tax expressed as a percentage of the price of a product, e.g. VAT

Aggregate demand

Total planned spending on domestically produced final goods and services in an economy over a period of time and consists of the sum of expenditure of households (consumers), firms, the government and foreign purchases of domestically produced goods and services, less spending by domestic residents on foreign made goods and services.

Aggregate supply

The total amount (quantity) of goods and services produced in an economy at different prices over a particular time period.

Allocative efficiency

Exists when ‘just the right amount’ from society’s point of view has been produced. It requires that, for the last unit produced, price to equal to its marginal cost.

Anti-dumping duties

Taxes (tariffs) that bring the import price of the good that is being dumped closer to the price charged by domestic firms in order to avoid injury to the domestic industry in the importing country.

Appreciation

An increase in the exchange rate within a flexible (floating) exchange rate regime

Balance of Payments

A record of all transactions of a country with the rest of the world over a period of time. It is broken down into the current account and the capital account

Break even output

That level of output for which the total revenues of a firm are equal to the total costs of production so that profits are zero.

Budget Deficit

Is where the government domestic revenue is less than government expenditure

Business cycle

The short-run fluctuations of real GDP around its long-run trend.

Capital

Produced means of production (tools, machines, equipment, factories, etc).

Capital account of BOP

Records the portfolio and foreign direct investments into and out of a country over a period of time.

Capital flight

Records the portfolio and foreign direct investments into and out of a country over a period of time.

Ceteris Paribus

All other factors remaining constant.

Circular flow

An economic model showing the major interrelationship and flows, real and monetary, between the major ‘players’ (decision-making units) of an economy.

Collusive Oligopoly

Formal collusion of oligopolistic firms agreeing to behave as if they were a monopoly by restricting output in order to fix price at a higher level.

Commodities

Primary products used as inputs in the manufacturing process and traded in international markets (e.g. coffee, cotton, tin, zinc, copper, etc.)

Consumption

spending by households (consumers) on goods and services

Current account deficit

The outflow of money for imports of goods and services plus investment income and/or transfers is greater than the revenue gained from exports of goods and services plus investment income and/or transfer

Custom Union

It is a form of economic integration where member countries agree to liberalize trade (trade freely amongst themselves) and adopt a common external tariff (or common trade policies towards non members).

Cyclical unemployment

Unemployment that is a result of insufficient aggregate demand (and of sticky money wages.) Cyclical unemployment rises as an economy moves deeper into recession

Deflation

Refers to the case where the average level of prices is decreasing through time. Deflation implies negative inflation rates

Deflationary gap

A deflationary gap is present if equilibrium (actual) real output falls short of the level corresponding to the full employment level of output as a result of insufficient aggregate demand.

Demand

the quantity of goods and services that consumers are willing, and able to buy at each possible price (over a given period of time)

Policies aimed at influencing the level of aggregate demand in order to affect growth, employment and inflation. They include fiscal and monetary policy.

Demerit goods

Consumption of such goods creates very significant negative externalities on society so governments try to decrease or prohibit their consumption. Typical examples include alcohol, tobacco and illegal drugs.

Depreciation (of a currency)

A decrease in the exchange rate within a floating (flexible) exchange rate system.

Devaluation (of a currency)

A decrease in the exchange rate within a fixed exchange rate system.

Differentiated products

Products which are similar but not identical across sellers in an industry. They are considered by consumers as close but not perfect substitutes.

Direct Tax

taxes (paid to the government) on income (households and firms)

Dynamic Efficiency

When a firm enjoys economies of scale, leading to faster rates of innovation (new products and new processes).

Economies and diseconomies of scale

Economies of scale exist if average costs decrease as the size of (scale) of the firm increases. A firm is facing diseconomies of scale if unit costs rise as it further expands in size.

Elasticity

The responsiveness of an economic variable to a change in some other economic variable. For example, price elasticity of demand.

Equilibrium

A market is considered to be in equilibrium if there is no tendency for change. This will be the case if quantity demanded per period equals quantity supplied.

Exchange rate

Price of one currency expressed in terms of another currency.

Exit barriers

Costs that a firm incurs upon exit.

Expenditure changing policy

Expenditure changing demand management policies that will lower aggregate demand and thus national income thus reducing imports and a trade deficit. Expenditure switching: policies that will try to switch expenditures away from imports and towards domestic products by making imports relatively more expensive and thus undesirable. For example, through devaluation or through the imposition of tariffs.

Expenditure switching policy

Refer to expenditure changing policy

Export subsidy

A payment granted by a government to domestic firms to strengthen their competitiveness against foreign producers.

Externalities

When an economic activity creates benefits or imposes costs for third parties for which these do not pay or do not get compensated respectively.

Factor Endowments

The quantity and quality of factors of production (land, labour, human capital, physical capital and entrepreneurship) an economy has at its disposal.

Fiscal Policy

Refers to the manipulation of the level of government spending (G) and of taxation (T) in order to affect aggregate demand; expansionary Fiscal policy is used if government spending (G) rises and / or taxes (T) decrease in order to reflate an economy in or falling into recession

Fixed Exchange Rate

The currency’s value is fixed against the value of another currency, a basket of other currencies or gold

Floating Exchange Rate

If the exchange rate is determined solely through the interaction of demand and supply for the currency with no government (central bank) intervention.

Foreign Direct investment

capital expenditure (long -term investment) by a multi-national company in the productive capacity of a foreign country.

Foreign Exchange Reserves

The value of foreign exchange holdings held at the central bank of a country.

Free Trade

Refers to international trade that is not subject to any type of trade barrier.

Free Trade Area (FTA)

An FTA is formed when two or more countries abolish tariffs (and other barriers) between them while maintaining existing barriers to non-members.

Frictional Unemployment

The term refers to people in between jobs. It is a form of unavoidable unemployment as people are constantly moving between jobs in search of better opportunities. Better and faster information concerning the labour market can lower this type of unemployment

Full employment

The term has come to refer to the situation where there is equilibrium in the labour market and thus any unemployment remaining is not demand-deficient. Any increase in total output beyond that level will prove inflationary and temporary.

Giffen goods

Giffen goods, together with Veblen goods, are an exception to the law of demand. If the price of such goods increases, quantity demanded per period will increase, giving rise to a positively sloped demand curve. A Giffen good has the following characteristic: it is a very strongly inferior good, it is consumed by the very poor and expenditure on such a good dominates total expenditures, e.g. potatoes during the Irish potato famine in the 19th century.

Gini coefficient

A measure of income inequality within a population that ranges from zero (perfect equality) to 1 (or 100) in the case of absolute inequality; Brazil has one of the highest Gini coefficients (about 0.60) whereas Austria has one of the lowest (0.25).

Globalisation

The process of increasing world-wide disconnectedness reflected in greater trade and cross border investment flows, the proliferation of multinationals and existence of faster and cheaper communication (internet, cell phones) and transportation.

Government Failure

When government policies aiming at correcting a market failure fail to do so as a result of unintended consequences, measurement problems, biases, etc.

Gross Domestic Product

The value of all final goods and services produced within an economy over a period of time, usually a year.

Homogenous Product

A product that consumers consider identical (perfect substitutes) across all firms of an industry.

Income elasticity of Demand

The responsiveness of demand to a change in income.

Infant Industry Argument

The argument that the only way a developing country can create a competitive domestic industrial sector is if it blocks all competing imports with prohibitive tariffs until it becomes sufficiently efficient.

Inferior goods

Goods for which demand decreases following a rise in consumers’ income.

Inflation

Refers to a sustained increase in the general price level.

Interest rate

The price or cost of borrowed money

J Curve Effect

Following devaluation, a trade deficit will typically worsen before it starts improving (thus tracing the letter ‘J’ through time) as the Marshall Lerner condition in the short run is not satisfied

Kinked Demand Curve

A theory where in a (non-collusive) duopoly if one firm lowers the price the rival firm will follow whereas if it raises price the rival will not follow it shows that in an oligopoly, even if cost conditions change, prices are ‘sticky’.

Law of Supply

As the price per unit increases, the quantity that a firm is willing to offer per period rises, ceteris paribus.

Long Run

The long run is defined as the time period during which all adjustments are considered possible; in production, it is when all factors of production are considered variable so no fixed factors exist. The firm can thus change its scale of operations in the long run.

Microcredit Schemes

Very small loans to the very poor in developing countries. These loans are to help them start or grow small businesses or meet emergencies.

Monetary Policy

The manipulation of interest rates in order to influence aggregate demand thus inflation, output and employment.

Monopolistic Competition

Many small firms, no entry, no exit barriers and differentiated products

Monopoly

One firm, unique product and high barriers to entry

Oligopoly

An industry where there are a few large firms, with at least one other characteristic of the
market form

Production possibilities curve (or frontier or boundary)

Shows the maximum amount of good Y an economy is able to produce for each amount of X it chooses to produce if it fully and efficiently employs all of its scarce resources with its given level of technology.

Productive Efficiency

When production takes place with minimum average (unit) costs, implying that production takes place with minimal resource waste.

Profit Maximisation

The assumed goal of the typical firm; firms will choose that level of output for which economic profits are maximum, which requires at marginal revenue is equal to marginal cost and that marginal cost is rising.

Public goods

Goods which are non-excludable and non-rival. Since they are non-excludable consumers have the incentive to conceal their preferences and behave as tree riders. Public goods are a case of market failure and typical examples include national defense, traffic lights, lighthouses, etc

Purchasing power parity (PPP) theory

A theory of long –run equilibrium exchange rate determination: in the absence of trade barriers, transportation costs and cross-border capital flows and if all goods were tradable then the market exchange rate would gravitate towards its PPP value, i.e. it would reflect cost-of-living differences.

Quota

A quantitative restriction of imports

Scarcity

The idea that human wants exceed the ability to produce goods and services from our limited resources to satisfy these wants.

Shutdown Rule

A loss-making firm in the short run ill shut down and exit only if the price (average revenue) is less than the average variable cost. In the long run it will shut down if it is making losses.

Tariff

A tax on imports

Terms of Trade (TOT)

The ratio of the average price of 3 exports over the average price of imports expressed as index numbers times 100. Shows the volume of imports attainable with a unit of exports.

Total, average and marginal product

Total product is the output derived from a specific combination of inputs. Average products (of labour) is derived on per worker. Marginal product of labour is the amount from on more unit of labour. It is the derived output from a change in labour. This is the slope of the total product curve.

Total, average and marginal revenues

Total revenues are defined as the product per unit price times the number of units sold. Average revenue is the total revenue divided by output. Marginal revenue is the extra revenue from selling one more unit of output. It is thus the change in total revenues from a change in output. This is the slope of the total revenue curve.

Trade cycle

Refer to the definition for business cycle

Transfer payments

Payments from the government to individuals that do not reflect contribution to current production. Examples of transfer payments include employment benefits and pensions

Unemployment

when individuals who are actively searching for a job cannot find one.

Utility

The satisfaction derived from consuming a good or a bundle of goods.

Wages

The reward of the factor of production, labour

Zero economic profits

Imply that total revenues are in total (economic) costs. Since normal profits are introduced in (economic) costs, it follows that a firm earning in economic profits is making just enough to remain in business (i.e. making normal profits)